Brazil cuts interest rates: A sign of trouble ahead?

May 7, 2012

Brazil’s central bank aggressively cut rates in March in an attempt to fight the rapid inflation of its currency and jumpstart an economy that continued to sputter in the first quarter of 2012. The sluggish figures carried over from 2011, when the Brazilian economy grew by just 2.9%. In comparison, Latin American economies averaged gross domestic product growth of 4.6% in 2011, and emerging market countries as a whole achieved 6.2% growth. (Source: International Monetary Fund, January 2012.)

Source: International Monetary Fund, January 2012

Many analysts expect Brazil to make a modest recovery in 2012. The International Monetary Fund and many independent forecasters expect 3% growth in 2012, while Brazilian President Dilma Rousseff has pledged growth of at least 4%.

Analysis and portfolio positioning

In the short term, the team managing Delaware Emerging Markets Fund believes that the interest rate cut is a positive development for equities because it should likely spur growth (especially on the consumption side) and encourage a shift from fixed income to equity investments. In the long term, the effect is hard to anticipate. Inflation, which is a major concern in Brazil, may increase later in the year.

While the team’s weightings are ultimately a function of its bottom-up (stock by stock) company research, its weighting in Brazil remains unchanged, as the members of the team believe that the country’s macroeconomic characteristics remain strong.

The portfolio management team of Delaware Emerging Markets Fund seeks to anticipate and benefit from the significant volatility that typically occurs within developing economies. It employs a rigorous analytical process to identify favorable stocks in these economies.

The views expressed represent the Manager’s assessment of the market environment as of May 2012, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the manager’s current views.

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International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

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